Economic Growth, Investment, and Exchange Rate Changes in a Poor‐Capital Economy

The discussion of the appropriate means to attain external balance arose as a result of the recurring problem of acute shortages of foreign exchange for many small, open, developing economies. Thus, as Findlay (1973) and Diamond (1978) contend, it is now widely held that the critical bottleneck restricting the rate of economic growth in developing countries is the shortage of foreign exchange. The Latin American structuralist school and the Indian strategy of development has long maintained that the limited capacity to import in relation to high and inelastic capital imports requirements has been one of the main factors responsible for the chronic inflation and stagnation in those countries.